UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification
Number
-------------- ------------------------------------- -------------------
1-7297 Nicor Inc. 36-2855175
(An Illinois Corporation)
1844 Ferry Road
Naperville, Illinois 60563-9600
(630) 305-9500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Shares of common stock, par value $2.50, outstanding at September 30, 2001, were
44,782,324.
Nicor Inc. Page i
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Table of Contents
Part I - Financial Information
Item 1. Financial Statements (Unaudited) ............................... 1
Consolidated Statements of Operations:
Three and nine months ended
September 30, 2001 and 2000 ................................... 2
Consolidated Statements of Cash Flows:
Nine months ended
September 30, 2001 and 2000 ................................... 3
Consolidated Balance Sheets:
September 30, 2001 and 2000, and
December 31, 2000 ............................................. 4
Notes to the Consolidated Financial Statements ................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 18
Part II - Other Information
Item 1. Legal Proceedings .............................................. 18
Item 6. Exhibits and Reports on Form 8-K ............................... 18
Signature ...................................................... 19
Exhibit Index .................................................. 20
Glossary
Degree day.....The extent to which the daily average temperature falls
below 65 degrees Fahrenheit. Normal weather for Nicor Gas'
service territory is about 6,100 degree days per year.
ICC............Illinois Commerce Commission, the agency that regulates
investor-owned Illinois utilities.
Mcf, MMcf, Bcf.Thousand cubic feet, million cubic feet, billion cubic feet.
PBR............Performance-based rate, a plan that provides economic
incentives based on performance.
TEU............Twenty-foot equivalent unit, a measure of volume in
containerized shipping equal to one 20-foot-long container.
Nicor Inc. Page 1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following condensed unaudited financial statements of Nicor Inc. (Nicor)
have been prepared by the company pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to SEC rules and regulations. The condensed
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the company's latest Annual Report on Form
10-K.
The information furnished reflects, in the opinion of the company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the results for the interim periods presented. Results for the
interim periods presented are not necessarily indicative of the results to be
expected for the full fiscal year due to seasonal and other factors.
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Consolidated Statements of Operations (Unaudited)
(millions, except per share data)
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Operating revenues $ 244.4 $ 301.0 $2,091.1 $1,308.7
-------- -------- -------- --------
Operating expenses
Cost of gas 79.0 129.2 1,434.8 666.2
Operating and maintenance 89.8 90.9 281.6 283.2
Depreciation 19.6 19.7 104.0 101.6
Taxes, other than income taxes 11.8 14.2 107.8 85.1
Other (9.2) 148.0 (11.4) 148.0
-------- -------- -------- --------
191.0 402.0 1,916.8 1,284.1
-------- -------- -------- --------
Operating income (loss) 53.4 (101.0) 174.3 24.6
Other income (expense), net 8.0 6.4 12.2 9.9
-------- -------- -------- --------
Income (loss) before interest
expense and income taxes 61.4 (94.6) 186.5 34.5
Interest expense, net of
amounts capitalized 10.5 11.9 36.6 33.9
-------- -------- -------- --------
Income (loss) before income taxes 50.9 (106.5) 149.9 .6
Income tax expense (benefit) 17.9 (43.8) 51.4 (6.1)
-------- -------- -------- --------
Net income (loss) 33.0 (62.7) 98.5 6.7
Dividends on preferred stock .1 .1 .2 .2
-------- -------- -------- --------
Earnings (loss) applicable to
common stock $ 32.9 $ (62.8) $ 98.3 $ 6.5
======== ======== ======== ========
Average shares of common stock
outstanding
Basic 45.0 45.8 45.2 46.3
Diluted 45.1 45.8 45.4 46.4
Earnings (loss) per average share
of common stock
Basic $ .73 $ (1.37) $ 2.17 $ .14
Diluted .73 (1.37) 2.17 .14
Dividends declared per share of
common stock $ .440 $ .415 $ 1.320 $ 1.245
The accompanying notes are an integral part of these statements.
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Consolidated Statements of Cash Flows (Unaudited)
(millions)
Nine months ended
September 30
-------------------
2001 2000
-------- --------
Operating activities
Net income $ 98.5 $ 6.7
Adjustments to reconcile net income to net cash flow
provided from operating activities:
Depreciation 104.0 101.6
Deferred income tax expense (benefit) 22.1 (7.8)
Change in assets and liabilities:
Accounts receivable, less allowances 362.4 91.6
Gas in storage 8.6 (31.3)
Deferred/accrued gas costs 191.2 (65.0)
Accounts payable (339.4) 73.8
Postretirement benefits (25.5) (21.1)
Other (5.8) 102.9
-------- --------
Net cash flow provided from operating activities 416.1 251.4
-------- --------
Investing activities
Capital expenditures (120.3) (115.8)
Net decrease (increase) in short-term investments (5.9) (5.7)
Loans to joint ventures (21.3) -
Other (2.2) .5
-------- --------
Net cash flow used for investing activities (149.7) (121.0)
-------- --------
Financing activities
Net proceeds from issuing long-term debt 197.6 49.9
Disbursements to retire long-term debt (227.1) (73.6)
Short-term borrowings (repayments), net (166.0) (.7)
Dividends paid (59.0) (56.9)
Disbursements to reacquire stock (28.4) (44.4)
Other - 1.3
-------- --------
Net cash flow used for financing activities (282.9) (124.4)
-------- --------
Net (decrease) increase in cash and cash equivalents (16.5) 6.0
Cash and cash equivalents, beginning of period 55.8 42.5
-------- --------
Cash and cash equivalents, end of period $ 39.3 $ 48.5
======== ========
The accompanying notes are an integral part of these statements.
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Consolidated Balance Sheets (Unaudited)
(millions)
September 30 December 31 September 30
2001 2000 2000
------------ ----------- ------------
Assets
Current assets
Cash and cash equivalents $ 39.3 $ 55.8 $ 48.5
Short-term investments, at cost
which approximates market 48.9 43.0 35.4
Accounts receivable, less
allowances of $15.6, $14.5 and
$8.0, respectively 296.5 658.9 268.2
Notes receivable - joint ventures 22.4 1.1 -
Gas in storage 23.2 31.8 62.3
Deferred income taxes 45.8 57.6 40.7
Deferred gas costs - 49.2 80.9
Other 23.8 17.2 41.6
------------ ----------- -----------
499.9 914.6 577.6
------------ ----------- -----------
Property, plant and equipment, at cost
Gas distribution 3,374.8 3,292.8 3,262.2
Shipping 294.6 281.8 300.7
Other 2.3 2.0 2.0
------------ ----------- -----------
3,671.7 3,576.6 3,564.9
Less accumulated depreciation 1,934.8 1,847.0 1,822.1
------------ ----------- -----------
1,736.9 1,729.6 1,742.8
------------ ----------- -----------
Other assets 274.4 241.2 235.4
------------ ----------- -----------
$ 2,511.2 $ 2,885.4 $ 2,555.8
============ =========== ===========
Liabilities and Capitalization
Current liabilities
Long-term obligations due
within one year $ - $ 125.0 $ 126.8
Short-term borrowings 276.0 442.0 343.5
Accounts payable 267.2 606.6 356.2
Accrued gas costs 142.0 - -
Accrued mercury-related costs 41.5 78.0 144.9
Temporary LIFO liquidation 5.9 - -
Other 78.8 59.9 42.7
------------ ----------- -----------
811.4 1,311.5 1,014.1
------------ ----------- -----------
Deferred credits and other liabilities
Deferred income taxes 315.9 296.6 284.7
Regulatory income tax liability 67.5 70.4 71.9
Unamortized investment tax credits 39.6 41.1 41.5
Other 107.6 104.6 83.4
------------ ----------- -----------
530.6 512.7 481.5
------------ ----------- -----------
Capitalization
Long-term debt 446.0 347.1 360.2
Preferred stock 6.1 6.3 6.3
Common equity
Common stock 112.0 113.7 114.1
Retained earnings 606.5 594.2 579.6
Accumulated other
comprehensive income (loss) (1.4) (.1) -
------------ ----------- -----------
1,169.2 1,061.2 1,060.2
------------ ----------- -----------
$ 2,511.2 $ 2,885.4 $ 2,555.8
============ =========== ===========
The accompanying notes are an integral part of these statements.
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Notes to the Consolidated Financial Statements (Unaudited)
ACCOUNTING POLICIES
Depreciation. Depreciation for the gas distribution segment is calculated
using a straight-line method for the calendar year. For interim periods,
depreciation is allocated based on gas deliveries.
Gas in storage. The gas distribution segment's inventory is carried at cost on a
last-in, first-out (LIFO) method on a calendar-year basis. For interim periods,
the difference between current replacement cost and the LIFO cost for quantities
of gas temporarily withdrawn from storage is recorded in cost of gas and in
current liabilities as a temporary LIFO liquidation.
Reclassifications. Certain reclassifications have been made to conform the
prior years' financial statements to the current year's presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. FAS 141 is effective for business
combinations completed after June 30, 2001 and FAS 142 is effective for fiscal
year 2002. Implementation of these standards is not expected to have a material
impact on the company's financial position or results of operations.
In August 2001, the FASB issued FAS 143, Accounting for Asset Retirement
Obligations. The standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. The standard is effective for 2003. The company is currently reviewing
the requirements of this new standard and has not yet determined its impact on
the company's financial position or results of operations.
In October 2001, the FASB issued FAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Statement 144 requires that long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. The
standard is effective for 2002 and generally is to be applied prospectively. The
implementation of this standard is not expected to have a material impact on the
company's financial position or results of operations.
REGULATORY MATTERS
Performance-based rate plan. Under Nicor Gas' performance-based rate (PBR) plan,
Nicor Gas' total gas supply costs are compared to a market-sensitive benchmark.
Savings and losses relative to the benchmark are shared equally with customers.
In 2002, the plan will be subject to Illinois Commerce Commission (ICC) review.
Results of the company's PBR plan are determined annually. On an interim basis,
the company records an estimate of results attributable to the period. Nicor
recorded $3.3 million and $7.5 million of estimated PBR results as operating
revenue for the three- and nine- month periods, respectively, compared to $5.4
million and $7.6 million in the corresponding prior year periods.
Nicor Inc. Page 6
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
Horizon Pipeline. In July 2001, Horizon Pipeline Company L.L.C. received final
approval from the Federal Energy Regulatory Commission for the construction and
operation of a 74-mile, 36-inch pipeline that will run from Joliet, Illinois to
near the Wisconsin/Illinois border. Horizon Pipeline is a 50/50 joint venture
between Nicor and Natural Gas Pipeline Company of America, a subsidiary of
Kinder Morgan, Inc. Construction of the pipeline commenced in October 2001, and
the pipeline is expected to be operational in the spring of 2002 at a total cost
of about $80 million.
Customer choice of commodity supplier. Also in July 2001, the company received
approval from the ICC to permanently expand the Customer Select(R) program to
include all of its customers beginning in March 2002. The matter is before the
ICC on rehearing with respect to certain program details, and a decision is
expected in January 2002. The program is currently available to all industrial
and commercial customers and about 14 percent of Nicor Gas' residential
customers. Under the program, customers are able to acquire their natural gas
supplies from third-party marketers. The choice of another natural gas commodity
supplier has no direct impact on Nicor Gas' distribution margin because natural
gas costs are passed directly through to customers without markup. Nicor Gas
continues to deliver the natural gas, maintain its distribution system and
respond to emergencies.
BUSINESS SEGMENT INFORMATION
Financial data by major business segment is presented below (in millions):
Three months ended Nine months ended
September 30 September 30
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Operating revenues
Gas distribution $ 156.3 $ 203.0 $1,776.4 $1,039.7
Shipping 52.7 60.4 165.7 180.9
Other energy ventures 39.2 38.1 181.0 88.7
Corporate and eliminations (3.8) (.5) (32.0) (.6)
-------- -------- -------- --------
$ 244.4 $ 301.0 $2,091.1 $1,308.7
======== ======== ======== ========
Operating income (loss)
Gas distribution $ 48.4 $ (106.6) $ 162.1 $ 5.9
Shipping 4.2 5.2 11.1 16.6
Other energy ventures 1.2 .9 3.1 4.5
Corporate and eliminations (.4) (.5) (2.0) (2.4)
-------- -------- -------- --------
$ 53.4 $ (101.0) $ 174.3 $ 24.6
======== ======== ======== ========
2001 operating revenues of other energy ventures include $3.3 million and $30.3
million from the sale of natural gas to Nicor Gas for the three- and nine-month
periods, respectively.
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) includes unrealized gains and losses from
derivative financial instruments accounted for as cash flow hedges.
Total comprehensive income (loss) consisted of the following (in millions):
Three months ended Nine months ended
September 30 September 30
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss) $ 33.0 $ (62.7) $ 98.5 $ 6.7
Other comprehensive loss,
net of tax (1.3) - (1.3) (.1)
-------- -------- -------- --------
$ 31.7 $ (62.7) $ 97.2 $ 6.6
======== ======== ======== ========
LONG-TERM DEBT
Nicor Gas has $275 million of First Mortgage Bonds remaining available for
issuance under a July 2001 shelf registration filing.
In 2001, Nicor Gas issued the following First Mortgage Bonds: $75 million due in
2008 at 5.875%, $50 million due in 2016 at 7.2%, and $75 million due in 2011 at
6.625%. Retirements of First Mortgage Bonds in 2001 were as follows: $75 million
due in 2001 at 6.45%, $50 million due in 2002 at 6.75%, and $50 million due in
2021 at 8.875%. Nicor Gas also retired $50 million of unsecured notes in 2001.
RELATED PARTY TRANSACTIONS
Nicor has a 50 percent interest in Nicor Energy L.L.C., a joint venture that
offers natural gas, electricity and related retail services to customers
primarily in Illinois. At September 30, 2001, Nicor had $10 million of
short-term notes receivable at market interest rates due from Nicor Energy.
At September 30, 2001, Nicor Horizon, Inc., a subsidiary of Nicor, had $12.4
million of short-term notes receivable at market interest rates due from the
Horizon Pipeline joint venture. For details concerning the Horizon Pipeline see
page 6.
CONTINGENCIES
Mercury program. Nicor Gas has incurred, and expects to continue to incur,
significant costs related to its historical use of mercury in various kinds of
company equipment.
Prior to 1961, gas regulators containing small quantities of mercury were
installed in homes. These gas regulators reduce the pressure of natural gas flow
from the service line to the inside of the home. During the third quarter of
2000, the company learned that in certain instances some mercury was spilled or
left in residences.
As a result, in September 2000, Nicor Gas was named as a defendant in a civil
lawsuit (the "Attorney General's Lawsuit") brought by the Illinois Attorney
General and the State's Attorneys of Cook, DuPage and Will Counties seeking,
among other things, to compel the company to inspect and clean up all homes and
other sites that may have been affected by mercury from company equipment. The
Circuit Court of
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
Cook County hearing this action entered two preliminary injunctions requiring
Nicor Gas, among other things, to conduct inspections and, where necessary, to
clean up mercury, to pay for relocating residents until cleanup is completed,
and to pay for medical screening of potentially affected persons. Potentially
affected homes are being inspected using mercury vapor analyzers. Nicor Gas had
called on every such home by December 31, 2000, although it still has been
unable to gain access to some homes. Approximately 1,060 homes have been found
to have traces of mercury requiring cleanup.
On October 10, 2001 Nicor Gas entered into a settlement agreement with respect
to the Attorney General's Lawsuit, and on the same date the Circuit Court of
Cook County entered an order approving the settlement. Under the settlement,
Nicor Gas will pay a total of approximately $2.25 million over a 5-year period.
Of this amount, $.4 million will be used to reimburse the plaintiffs for their
costs and the balance will be used to fund environmental programs. In addition,
Nicor Gas will continue for a period of five years to provide medical screening
to persons who may have been exposed to mercury from Nicor Gas equipment.
Nicor Gas is also the subject of an Administrative Order, and an amendment
thereto, issued during the third quarter of 2000 by the U.S. Environmental
Protection Agency (EPA) pursuant to Section 106 of the Comprehensive
Environmental Response, Compensation and Liabilities Act. The order requires the
company, among other things, to develop and implement work plans to address
mercury spills at recycling centers where mercury regulators may have been
taken, at company facilities where regulators and mercury may have been
temporarily stored and at commercial/industrial sites where mercury-containing
equipment may have been used in metering facilities. Pursuant to the injunctions
and the EPA Administrative Order, Nicor Gas has completed the work described
above for all affected recycling centers, commercial/industrial sites and
company facilities. On July 12, 2001, Nicor Gas received a Notice of Completion
letter from the EPA regarding the work performed under the Section 106
Administrative Order.
In addition to the matters described above, Nicor Gas has been named a defendant
in several private lawsuits, all in the Circuit Court of Cook County, claiming a
variety of unquantified damages (including bodily injury, property and punitive
damages) allegedly caused by mercury-containing regulators. One of the lawsuits
involves five previous class actions that have been consolidated before a single
judge. On October 10, 2001, Nicor Gas entered into an agreement to settle the
class action litigation. Under the terms of that agreement, Nicor Gas will pay a
total of approximately $1.85 million, will continue for a period of five years
to provide medical screening to persons exposed to mercury from its equipment,
and will use its best efforts to replace any remaining inside residential
mercury regulators within four years. The class action settlement agreement
requires court approval, which is currently being sought, and the agreement
permits class members to "opt out" of the settlement and pursue their claims
individually.
Nicor Gas charged $148 million to other operating expense in the third quarter
of 2000 for estimated obligations related to the previously described work and
for legal defense costs. A $9 million adjustment lowered the mercury-related
reserve and reduced other operating expense in the third quarter of 2001. More
recent experience indicates reductions in the overall assumed rate of homes
estimated to be found with traces of mercury requiring cleanup and lower average
cleanup and repair costs. Through September 30, 2001, the company has incurred
$97.5 million in associated costs, leaving a $41.5 million current liability.
The remaining liability represents management's best estimate of future costs,
including potential liabilities relating to lawsuits, based on an evaluation of
currently available information. Actual costs may vary from this estimate. The
company will continue to reassess its estimated obligation and will record any
necessary adjustment, which could be material to operating results in the period
recorded.
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
The company has certain insurance policies, has notified its insurers, and is
vigorously pursuing recovery of mercury-related costs pursuant to its insurance
coverage. In January 2001, the company filed suit in the Circuit Court of Cook
County against certain of its insurance carriers for a declaration that the
company's mercury-related losses are covered, and for the recovery of those
losses. Nicor Gas is also pursuing certain insurance recoveries through
arbitration. In addition, some of the removals of mercury-containing regulators
were conducted by independent contractors working for the company. In November
2000, the company filed suit in the Circuit Court of Cook County seeking
indemnification and contribution from these contractors. Through September 30,
2001, Nicor Gas has recovered, net of related expenses, $2.4 million from
certain insurance carriers of the company and its independent contractors. These
recoveries have been recorded as a reduction to other operating expense. At this
stage, it is not possible to estimate the likelihood of additional recoveries
from insurance carriers or other third parties related to the mercury spills and
Nicor Gas has not recorded any such amounts as assets in its financial
statements.
Nicor Gas will not seek recovery of the costs associated with these mercury
spills from its customers, and any proceeds from insurance carriers or third
parties will be retained by the company to offset costs incurred.
It is management's opinion, taking into account the above information and
uncertainties, including currently available information concerning the
company's existing and potential obligations, insurance coverage, possible
recoveries from other third parties and available financial resources, that
costs associated with the mercury spills will not have a material adverse effect
on the liquidity or financial position of the company.
Manufactured gas plant sites. Current environmental laws may require cleanup of
certain former manufactured gas plant sites. To date, Nicor Gas has identified
about 40 properties for which it may, in part, be responsible. The majority of
these properties are not presently owned by the company. Information regarding
preliminary site reviews has been presented to the Illinois Environmental
Protection Agency. More detailed investigations and remedial activities are
either in progress or planned at many of these sites. The results of continued
testing and analysis should determine to what extent additional remediation is
necessary and may provide a basis for estimating any additional future costs
which, based on industry experience, could be significant. In accordance with
ICC authorization, the company has been recovering these costs from its
customers.
In December 1995, Nicor Gas filed suit in the Circuit Court of Cook County
against certain insurance carriers seeking recovery of environmental cleanup
costs of certain former manufactured gas plant sites. Nicor Gas reached a
settlement with one of the insurance carriers, and in February 2000, the court
dismissed the company's case on summary judgment motions by certain other
defendants. The company filed an appeal in March 2000. In the second quarter of
2001, Nicor Gas reached a recovery settlement with certain insurance carriers
who were involved in this appeal. Management cannot predict the outcome of the
lawsuit against the remaining insurance carriers. Recoveries are refunded to the
company's customers.
Since costs and recoveries relating to the cleanup of these manufactured gas
plant sites are passed directly through to customers, the final disposition of
these matters is not expected to have a material impact on the company's
financial condition or results of operations.
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Notes to the Consolidated Financial Statements (Unaudited) (concluded)
Other. The company is involved in legal or administrative proceedings before
various courts and agencies with respect to rates, taxes and other matters.
Although unable to determine the outcome of these contingencies, management
believes that appropriate accruals have been recorded. Final disposition of
these matters is not expected to have a material impact on the company's
financial condition or results of operations.
Nicor Inc. Page 11
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the Management's
Discussion and Analysis section of the Nicor 2000 Annual Report on Form 10-K.
SUMMARY
Nicor's diluted earnings (loss) per share for the three- and nine-month periods
ended September 30, 2001, was $.73 and $2.17, respectively, compared to $(1.37)
and $.14, respectively, in 2000. Net income (loss) for the three- and nine-month
periods was $33.0 million and $98.5 million, respectively, compared to $(62.7)
million and $6.7 million, respectively, a year ago.
An unusual charge of $148 million was recorded as operating expense in the third
quarter of 2000 to establish a reserve related to the gas distribution segment's
mercury inspection and repair program. A $9 million adjustment lowered the
mercury-related reserve and reduced other operating expense in the third quarter
of 2001. Operating income for both 2001 periods includes the positive effect of
partial recoveries from insurers and contractors. For details of Nicor Gas'
mercury inspection and repair program see page 7.
Excluding these unusual mercury-related impacts, Nicor's diluted earnings per
share for the three- and nine-month periods ended September 30, 2001, were $.61
and $2.01, respectively, compared to $.59 and $2.07 in the corresponding 2000
periods. Net income, excluding the mercury-related impacts increased $.4 million
to $27.4 million for the three-month period and decreased $4.8 million to $91.6
million for the nine-month period.
Excluding the mercury-related impacts, a decline in operating income for both
periods occurred in the company's two major business segments - gas distribution
and shipping. Nicor's other energy ventures posted a modest increase in
operating income for the quarter, although year-to-date operating income from
these ventures is lower than the year-ago period. Nonoperating results for both
periods reflect increased interest income from higher short-term investment
balances. Decreased interest expense and improved results from Nicor's
nonregulated retail energy marketing joint venture are reflected in 2001 third
quarter earnings. Per share results in both periods were favorably affected by
the company's common stock repurchase program.
Operating income. Operating income (loss) by major business segment was (in
millions):
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Gas distribution $ 48.4 $ (106.6) $ 162.1 $ 5.9
Shipping 4.2 5.2 11.1 16.6
Other energy ventures 1.2 .9 3.1 4.5
Corporate and eliminations (.4) (.5) (2.0) (2.4)
-------- -------- -------- --------
$ 53.4 $ (101.0) $ 174.3 $ 24.6
======== ======== ======== ========
The following summarizes operating income comparisons for business segments:
o Gas distribution operating income for the three- and nine-month periods ended
September 30, 2001, increased substantially when compared to the
corresponding prior-year periods. However, excluding
Nicor Inc. Page 12
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
the unusual mercury-related impacts, gas distribution operating income
decreased slightly to $39.2 million and $150.7 million for the current three-
and nine-month periods, respectively, compared to $41.4 million and $153.9
million a year ago. Results for both periods reflect an increase in operating
and maintenance expense related to last winter's higher natural gas prices,
which more than offset slightly improved gas distribution margin for the
nine-month period. Factors impacting margin and operating and maintenance
expense are discussed on page 13.
o A slowdown in the U.S. and Caribbean economies has resulted in a decrease in
containerized shipping operating income of $1.0 million and $5.5 million for
the three- and nine-month periods ended September 30, 2001, respectively.
Lower volumes shipped more than offset the positive effect of slightly higher
average rates and lower operating and maintenance expense for both periods.
o Operating income from Nicor's other energy ventures decreased $1.4 million
for the nine-month period. Improved year-to-date operating results from
Nicor's wholesale natural gas marketing and residential energy-related
products and services businesses were more than offset by a decline in
operating income from Nicor's technology business.
Nonoperating items. Other income for the quarter was $8.0 million, compared to
$6.4 million a year ago. Other income year-to-date increased to $12.2 million in
2001 from $9.9 million in 2000. Increased interest income from higher short-term
investment balances contributed to the improvement for the three- and nine-month
periods. In addition, Nicor's nonregulated retail energy marketing joint venture
posted improved results in the third quarter of 2001.
Interest expense for the three-month period decreased $1.4 million to $10.5
million due to lower interest rates. Interest expense for the nine-month period
increased from $33.9 million in 2000 to $36.6 million in 2001 due to higher
average borrowing levels. Increased gas procurement costs, costs associated with
the mercury inspection and repair program and a new customer deferred payment
plan contributed to the higher borrowing levels.
Exclusive of the mercury-related impacts, the effective tax rate declined to 34%
for the nine months ended September 30, 2001, due to a reduction in Nicor's
effective income tax rate related to the shipping segment. Beginning in 2001,
deferred taxes are no longer recorded on undistributed foreign earnings that are
indefinitely reinvested offshore. The overall effective income tax rate for the
2000 periods varied from its customary level due to the effect of the unusual
charge by Nicor Gas related to its mercury program described on page 7.
Excluding the mercury charge, federal and state income taxes were provided at
Nicor's more typical effective income tax rate of about 35%.
2001 Outlook. Excluding any charges or credits related to the mercury inspection
and repair program and assuming normal weather for the remainder of the year,
management currently expects 2001 annual diluted earnings to be in the range of
$3.00 to $3.10 per share. Although management believes the foregoing
forward-looking statements about its earnings expectations are based on
reasonable assumptions, actual results may vary materially from stated
expectations. Other factors that could cause materially different results
include, but are not limited to, natural gas prices, interest rates, economic
and market conditions, energy conservation, legislative and regulatory actions,
asset sales, and performance-based rate (PBR) plan results.
Nicor Inc. Page 13
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
RESULTS OF OPERATIONS
Details of various financial and operating information by segment can be found
in the tables on pages 16 and 17. The following discussion summarizes the major
items impacting Nicor's earnings.
Operating revenues. Operating revenues by major business segment were (in
million):
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Gas distribution $ 156.3 $ 203.0 $1,776.4 $1,039.7
Shipping 52.7 60.4 165.7 180.9
Other energy ventures 39.2 38.1 181.0 88.7
Corporate and eliminations (3.8) (.5) (32.0) (.6)
-------- -------- -------- --------
$ 244.4 $ 301.0 $2,091.1 $1,308.7
======== ======== ======== ========
The fluctuations in gas distribution revenues were due primarily to significant
volatility in natural gas costs, which are passed directly through to customers
without markup. For both periods, the decline in shipping revenues reflects
lower volumes compared to a year ago. Reduced volumes were due to a slowdown in
the economy, which has resulted in lower construction- and tourist-related
shipments in the Carribean region. Revenues generated from Nicor's wholesale
natural gas marketing business accounted for the year-to-date increase in other
energy ventures due to higher natural gas prices in the first and second
quarter. The elimination of natural gas sales from Nicor's wholesale natural gas
marketing business to Nicor Gas is reflected in corporate and eliminations.
Gas distribution margin. Gas distribution margin, defined as operating revenues
less cost of gas and revenue taxes, which are both passed directly through to
customers, decreased slightly in the third quarter to $97.7 million compared to
$98.2 million a year ago. For the nine months ended September 30, 2001, gas
distribution margin increased to $377.7 million compared to $372.7 million in
2000. Positively affecting margin for both periods were higher customer
financing charges and larger contributions from gas supply-related services.
Both the three- and nine-month comparisons were adversely affected by lower
demand unrelated to weather. The three-month period also reflects lower
performance-based rate plan results, which may vary from quarter to quarter. The
nine-month period was also negatively impacted by the higher cost of natural gas
used to operate company equipment and facilities and the absence of income
relating to a large construction project recorded in the second quarter of last
year.
Operating and maintenance. Operating and maintenance expense for 2001 decreased
$1.1 million to $89.8 million and $1.6 million to $281.6 million, in the three-
and nine-month periods, respectively. Decreased volumes and actions taken by
management to respond to the economic slowdown resulted in lower operating and
maintenance expenses in the shipping segment for both periods. For both 2001
periods, improvements in the shipping segment were nearly offset by increased
operating expenses in the gas distribution segment and at Nicor's other energy
ventures. The increase in the gas distribution segment was due primarily to
higher bad debt expense in both periods resulting from last winter's higher
natural gas prices. Higher operating and maintenance expenses at Nicor's other
energy ventures were primarily associated with an increased volume of activity.
Nicor Inc. Page 14
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Other operating expense. Other operating expense reflects estimated costs,
credits and recoveries associated with the company's mercury inspection and
repair program. Additional information about this program is presented under the
heading Mercury Program on page 7.
FINANCIAL CONDITION AND LIQUIDITY
Operating cash flows. Net cash flow from operating activities increased $164.7
million to $416.1 million for the nine months ended September 30, 2001, due
primarily to changes in working capital items in the gas distribution segment.
Working capital can swing sharply due to factors such as weather, the price of
gas, the timing of collections from customers and gas purchasing practices. The
company generally relies on short-term financing to meet temporary increases in
working capital needs.
Financing activities. Nicor and its gas distribution subsidiary maintain
short-term line of credit agreements with major domestic and foreign banks. At
September 30, 2001, these agreements, which serve as backup for the issuance of
commercial paper, totaled $432.5 million and the company had $276.0 million of
commercial paper outstanding.
Nicor Gas has $275 million of First Mortgage Bonds remaining available for
issuance under a July 2001 shelf registration filing.
In 2001, Nicor Gas issued the following First Mortgage Bonds: $75 million due in
2008 at 5.875%, $50 million due in 2016 at 7.2%, and $75 million due in 2011 at
6.625%. Retirements of First Mortgage Bonds in 2001 were as follows: $75 million
due in 2001 at 6.45%, $50 million due in 2002 at 6.75%, and $50 million due in
2021 at 8.875%. Nicor Gas also retired $50 million of unsecured notes in 2001.
Under a common stock repurchase program completed in October 2001, Nicor
purchased and retired 482,000 common shares during the third quarter of 2001 at
an aggregate cost of $18.2 million. For the nine-month period, Nicor purchased
740,000 common shares at an aggregate cost of $28.2 million. In September 2001,
Nicor announced another $50 million common stock repurchase program. Purchases
are being made as market conditions permit through open market transactions and
to the extent cash flow is available after other investment opportunities.
Effective with the dividend paid on May 1, 2001, Nicor's quarterly dividend on
common stock was increased to 44 cents per share. This payment represents an
annual rate of $1.76 per share, which is 6 percent higher than the $1.66 rate
established with the May 1, 2000 dividend.
OTHER
Weather hedging. Beginning in 2000, Nicor Gas began hedging the impact of
significant weather fluctuations. For 2001 Nicor Gas entered into an agreement
with a third party to protect the company's earnings if weather is warmer than
5,700 degree days, which is about 7 percent warmer than normal. To partially
offset the cost of this earnings protection, Nicor Gas has also agreed to pay
this party if weather for 2001 is colder than 6,100 degree days, which is
approximately normal. Under the terms of these agreements the maximum payout or
receipt is limited to $17.5 million which is equivalent to approximately 900
degree days, or about 15 percent of normal. Nicor Gas has entered into similar
agreements for 2002.
Nicor Inc. Page 15
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Horizon Pipeline. Horizon Pipeline is a 50/50 joint venture between Nicor and
Natural Gas Pipeline Company of America, a subsidiary of Kinder Morgan, Inc. The
joint venture will construct and operate a 74-mile, 36-inch pipeline from
Joliet, Illinois to near the Wisconsin/Illinois border at an estimated cost of
about $80 million. The project has received final Federal Energy Regulatory
Commission approval. The pipeline capacity is nearly fully subscribed under
10-year agreements, with Nicor Gas having contracted for approximately 80
percent of the 380 MMcf per day initial capacity. Construction of the pipeline
commenced in October 2001, and the pipeline is expected to be operational in
2002.
Customer choice of commodity supplier. In July 2001, the company received
approval from the ICC to permanently expand the Customer Select(R) program to
include all of its customers beginning in March 2002. The matter is before the
ICC on rehearing with respect to certain program details, and a decision is
expected in January 2002. The program is currently available to all industrial
and commercial customers and about 14 percent of Nicor Gas' residential
customers. Under the program, customers are able to acquire their natural gas
supplies from third-party marketers. The choice of another natural gas commodity
supplier has no direct impact on Nicor Gas' distribution margin because natural
gas costs are passed directly through to customers without a markup. Nicor Gas
continues to deliver the natural gas, maintain its distribution system and
respond to emergencies.
Asset acquisition of Kent Line International container division. In October
2001, Tropical Shipping, a subsidiary of Nicor Inc., acquired the container
assets of Kent Line International. With this acquisition, Tropical Shipping will
begin offering Canadian customers an all-water service from Saint John in New
Brunswick, Canada to Tropical's network of Caribbean destinations. The
acquisition is expected to increase Tropical Shipping's annual volumes by about
10 percent.
Pension investment returns. Nicor Gas maintains noncontributory defined benefit
pension plans covering substantially all employees hired prior to January 1,
1998. For valuation purposes Nicor Gas utilizes a September 30 measurement date
to determine the company's annual pension expense or credit. During the 12
months ended September 30, 2001 the pension plan experienced negative investment
returns, which will negatively impact the company's pension credit and operating
income beginning in 2002. The impact has not yet been quantified.
Market risk. The company is exposed to market risk in the normal course of its
business operations, including the risk of loss arising from adverse changes in
natural gas commodity prices and interest rates. There has been no material
change in the company's exposure to market risk since December 31, 2000.
Nicor Inc. Page 16
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
GAS DISTRIBUTION STATISTICS
Operating revenues, deliveries, customers and other statistics are presented
below.
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Operating revenues (millions):
Sales
Residential $ 93.5 $ 133.2 $1,258.0 $ 691.6
Commercial 13.7 20.3 235.6 126.4
Industrial 1.8 2.8 35.8 18.1
-------- -------- -------- --------
109.0 156.3 1,529.4 836.1
-------- -------- -------- --------
Transportation
Residential 1.8 1.8 6.7 4.0
Commercial 12.1 13.7 54.5 54.2
Industrial 12.8 12.8 35.8 35.6
Other .7 .9 6.7 4.5
-------- -------- -------- --------
27.4 29.2 103.7 98.3
-------- -------- -------- --------
Other revenues
Revenue taxes 7.9 9.3 95.0 70.1
Performance-based rate plan 3.3 5.4 7.5 7.6
Chicago Hub 3.4 1.6 9.0 3.9
Weather insurance - - - 7.3
Other 5.3 1.2 31.8 16.4
-------- -------- -------- --------
19.9 17.5 143.3 105.3
-------- -------- -------- --------
$ 156.3 $ 203.0 $1,776.4 $1,039.7
======== ======== ======== ========
Deliveries (Bcf):
Sales
Residential 14.8 15.4 140.6 134.3
Commercial 2.6 2.4 26.9 24.7
Industrial .4 .3 4.3 3.8
-------- -------- -------- --------
17.8 18.1 171.8 162.8
-------- -------- -------- --------
Transportation
Residential .5 .5 4.2 1.8
Commercial 8.6 10.1 61.3 60.3
Industrial 32.3 40.3 103.5 121.7
-------- -------- -------- --------
41.4 50.9 169.0 183.8
-------- -------- -------- --------
59.2 69.0 340.8 346.6
======== ======== ======== ========
Customers at end of period (thousands):
Sales
Residential 1,748.0 1,726.3
Commercial 98.2 93.9
Industrial 6.4 6.2
-------- --------
1,852.6 1,826.4
-------- --------
Transportation
Residential 59.7 54.1
Commercial 67.5 70.6
Industrial 7.2 7.5
-------- --------
134.4 132.2
-------- --------
1,987.0 1,958.6
======== ========
Other statistics:
Degree days 85 79 3,724 3,283
Colder (warmer) than normal (3)% (10)% (5)% (17)%
Average gas cost per Mcf sold $ 2.83 $ 5.20 $ 7.56 $ 3.63
* The company holds weather derivative instruments to limit the earnings impact
of weather fluctuations. See Weather hedging on page 14.
Nicor Inc. Page 17
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (concluded)
SHIPPING STATISTICS
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
TEUs shipped (thousands):
Southbound 27.9 33.2 87.4 100.9
Northbound 4.7 4.6 13.8 13.2
Interisland 1.6 1.6 4.6 5.3
34.2 39.4 105.8 119.4
Other statistics:
Revenue per TEU $ 1,539 $ 1,510 $ 1,564 $ 1,501
Ports served 22 22
Vessels operated 16 19
Nicor Inc. Page 18
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
For disclosures about market risk, see Market Risk on page 15, which is
incorporated herein by reference.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For information concerning legal proceedings, see Contingencies beginning on
page 7, which is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on page 20 filed herewith.
(b) The company did not file a report on Form 8-K during the third quarter of
2001.
Nicor Inc. Page 19
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Nicor Inc.
Date October 31, 2001 By /s/ KATHLEEN L. HALLORAN
---------------------- --------------------------
Kathleen L. Halloran
Executive Vice President
Finance and Administration
Nicor Inc. Page 20
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Exhibit Index
Exhibit
Number Description of Document
------- ------------------------------------------------------------------
4.01 Supplemental Indenture, dated August 15, 2001, of Nicor Gas to BNY
Midwest Trust Company, Trustee, under Indenture dated as of January
1, 1954.